Target Costing

Definition: Target Costing is a strategic cost management technique used by companies to determine the desired cost of a product or service based on the market's price expectations and the company's profit objectives. Also known as Zielkostenmanagement in German, Target Costing enables businesses to design, develop, and manufacture products that meet customer needs, while maintaining profitability.

In the competitive world of business, companies strive to offer products at the most competitive prices, ensuring customer satisfaction and market share growth. At the same time, profits are essential for a company's sustainability and growth. Target Costing encompasses the integration of customer value, competitive pricing, and desired profitability, resulting in the successful development of cost-effective products.

The process of Target Costing begins with the identification of customer preferences and needs through market research and analysis. By thoroughly understanding customer requirements, companies can align their product development strategies accordingly. Next, a target price is determined based on the price expectations of the market and competitors' offerings. It is crucial to set a target price that meets customer expectations and provides a competitive advantage.

Once the target price is established, companies assess the difference between the desired price and the expected cost, referred to as the target cost. The target cost includes all expenses associated with product development, manufacturing, distribution, and after-sales services. By subtracting the targeted cost from the target price, the maximum allowable budget for manufacturing the product is determined.

To achieve the target cost, companies adopt a cross-functional approach, involving teams from different departments, such as design, engineering, marketing, and procurement. These teams collaborate to identify cost drivers, such as materials, labor, and overheads, and explore opportunities for cost reduction through various strategies, including value engineering, supplier collaboration, value analysis, and process improvement.

Furthermore, Target Costing demands a flexible approach to design and production. It encourages the use of alternative materials, manufacturing techniques, and production processes to meet cost objectives. Additionally, ongoing cost monitoring and control are critical to ensure adherence to the target cost throughout the product life cycle and adapt to any changes in market dynamics or customer preferences.

In conclusion, Target Costing plays a vital role in the success of businesses by aligning customer expectations, market demands, and profitability objectives. By implementing this strategic cost management technique, companies can develop and deliver cost-effective products that meet customers' needs, gaining a competitive edge in the market.